Fuelling the recovery: how India’s path from fuel subsidies to taxes can help Indonesia

Indonesia’s comparatively low rate of taxation, exacerbated by falling revenues during the COVID-19 pandemic, has created significant fiscal problems. Well-designed transport fuel taxes can be an effective and efficient way to fill this gap, as demonstrated by experience in India. Over the past decade, India transitioned from high transport fuel subsidies to relatively high taxes, delivering significant revenue that most recently has funded the country’s COVID-19 response. The revenues from tax can also be used to fund targeted compensation packages to those that would suffer most from increased fuel prices, creating highly progressive outcomes. Drawing on India’s experience, this brief recommends increasing taxes as an alternative approach to price reform that could take place simultaneously with subsidy reform efforts.